1. IT stocks take a tumble after TCS cautions on Q3 revenue growth

IT stocks take a tumble after TCS cautions on Q3 revenue growth

The IT sector led the market fall on Monday as the Tata Consultancy Services (TCS) scrip reacted to cautious management commentary...

By: | Mumbai | Updated: December 16, 2014 6:04 AM

The IT sector led the market fall on Monday as the Tata Consultancy Services (TCS) scrip reacted to cautious management commentary in an analyst call on Tuesday. As TCS, the country’s biggest IT services provider, warned of weaker industry sentiment for the quarter ending  December 2014 compared to last year, selling pressure in the IT space intensified.

After opening in the red, TCS fell to as low as 4% and hovered near the day’s low before closing down 3.8%. This was the lowest closing for the most valued Indian stock in nearly five months. The BSE IT index also lost points 200.09 points, or 1.94%. While Mphasis and Tech Mahindra fell 4.4% and 3.7%, respectively, HCL Tech and Infosys declined 1.7% and 0.8%.

In an analyst call on Friday, the management said revenue for Q3  – a quarter of seasonality  – is “going to reflect, unfortunately, the negativity of the seasonality”. Given that Q2 numbers failed to meet expectations while Q3 numbers are also expected to be seasonally weak, the IT giant indicated that it is likely to report lower revenue growth for the fiscal 2014-15, compared to FY14. Referring to currency volatility during the quarter, the management indicated that cross-currency is likely to impact USD revenue growth by about 220 bps and, in terms of reported INR, the negative impact could be in the order of 10-20 bps.

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After the call, analysts were quick to downgrade their earnings per share (EPS) estimates for FY16-FY17 even as the company refrained from giving CY15 guidance and said it will be better placed to provide more information in the first two months of 2015.

Ambit Capital, Jefferies and Barclays Capital moderated their EPS estimates while Antique Stock Broking downgraded the stock to ‘hold’ as it doesn’t expect the stock to re-rate going forward in the wake of muted management expectations. Jefferies noted that  the stock faces the risk of near-term under-performance. “It remains to be seen if the money exiting TCS will move into other IT stocks or move into cyclicals (banks / financials),” it said.

TCS has outdone peer Infosys and the benchmark Sensex in four of the last five years and on the back of its consistent record of beating Street estimates, has turned into the only company to have achieved R5-lakh-crore market cap in 2014.

TCS said that retail, manufacturing and hi-tech may witness impact of holidays and furloughs. On the BFSI front, TCS is expecting a weak quarter on seasonality and continuing weakness in insurance and banking products portfolios.

Even after losing 13% from its valuations, the stock is currently trading at 20 times its one-year forward earnings compared to a P/E multiple of 17.4 for Infosys.

Ambit Capital, which reduced its FY15-17 EPS estimates by 2-5% and trimmed its target price by 5% to R2,900, however, maintained its ‘buy’ rating on the stock. “TCS remains well-positioned to benefit from the long-term structural growth in Indian IT services, driven by its operational excellence, strong portfolio and consistent track record of making the right investment bets,” added Ambit in a note.

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